A Critical Analysis of Efficiency Wage Theory: Empirical Evidences

The relationship between productivity and wage level is certain. Contrary to the traditional wage theories, the theory of wage efficiency justifies higher wages as a factor for enhancing higher productivity. In addition to providing a logical and economic justification for downward wage rigidity, which is supported by the new-Keynesian school, this theory approves the payment of wages above the market rate by some firms, on the basis of observing higher efficiencies for workers with higher wages. According to the theory of efficient wages, the best efficient workers will be employed when wages above the average market rate are paid. This paper examines the efficient wages and their associated models using evidences among a number of different countries.